Saturday, September 09, 2006

Who are the richest rich?

Motivated by all the blogosphere buzz about inequality, I have been reading the latest work of Emmanuel Saez and Thomas Piketty. Saez was on the faculty at Harvard for a while, but unfortunately (for me) he left after a few years to teach at Berkeley. He is doing some very solid empirical work on inequality.

One striking fact, as some leftish pundits like to emphasize, is that the richest rich are doing very, very well. The top 0.01 percent of the income distribution, those now making more than $5 million a year, have increased their take of the income distribution (before taxes) from 0.86 percent in 1980 to 3.19 percent in 2004, the most recent year available. (It peaked in 2000 at 3.44 percent.)

One shouldn't overestimate the impact of this particular change for the overall economy or the median worker: This increased share represents only about one year of normal economic growth. But one cannot argue that this increase is small or uninteresting. Putting aside for a moment the typical overwrought discussion of policy and politics, the positive question of why the richest rich have done so well is fascinating as a matter of economics.

Here is the question I would like answered: Who is this group? They make up about 14,000 taxpayers. Some of them are CEOs, but the Fortune 500 has only about 500 of them. The group includes some athletes, actors, media personalities, hedge fund managers, and trial lawyers. Some of the richest rich start and run their own businesses. Some are authors (but, sadly, none is likely to be a textbook author).

Different economic forces are probably at work in different occupations. Stock options, for example, are more important for CEOs than for athletes. It would be great to see a study of the composition of this elite group. Has the composition across job types changed over time? Has the increased share of income accrued more to some job types than others?

One thing we do know is that, according to Saez and Piketty, there has been "a sharp change in the composition of top incomes away from capital income and toward labor income." The percent of this elite group's income that comes in the form of dividends, interest, and rent has fallen from 56 percent in 1980 to 25 percent in 2004. Increasingly, the top income group is not the idle rich but the working rich. But what kind of work are they doing to earn all this extra income?

If anyone knows of a relevant study, please let me know. And if anyone hears about one of these jobs opening up that requires a nerdy, middle-aged, academic economist, let me know about that, too.

About Me

I am a professor and chairman of the economics department at Harvard University, where I teach introductory economics (ec 10). I use this blog to keep in touch with my current and former students. Teachers and students at other schools, as well as others interested in economic issues, are welcome to use this resource.